Size is relative. When you go from 1 person in a soccer stadium to 2, it is disingenuous to call that 100% growth. Venture capital is still in its infancy in Africa and while the amounts raised between 2016 and 2017 doubled, the total amounts (approximating US$560 million) are small relative to other regions such as India, and remain skewed by large funds. At its core, venture capital in African markets is growth capital and the rules that apply in Silicon Valley continue to fall short of delivering value in markets such as Nigeria. Funds cannot be about pure play software or seeking companies that can get to $100m of revenue due to exponential user growth. Instead, effective investment strategies have to focus on hardware and software companies strengthening the underlying pillars of economic development. Pure play tech funds should stay away.
Economic value is created through the interplay of physical capital, human capital, and financial markets. Economies require infrastructure (such as roads and power) to function. Smartphones are only paper weights if they don’t have power to be charged. That infrastructure only becomes productive when utilized by a healthy and educated workforce. This is the “economic flywheel” of sustained economic growth that we have witnessed in Asia. To create the flywheel markets must match labor to capital thereby increasing productivity gains which in turn creates liquidity and drives demand. However manufacturing is essential to this formula and African economies will not succeed without a systematic approach to manufacturing policy. When demand increases it is important for local economies to fill that supply. Traditional Silicon Valley investors are largely missing this and the importance of the knock-on effects to the larger African venture ecosystem.
At Lateral Capital, we are investing in African companies building tech-enabled, decentralized infrastructure, profitably tackling key verticals like healthcare, energy and financial services. Understanding that frontier markets account for approximately 80 percent of the global population yet account for around 10 percent of private equity investments, we work to bridge the gap and support early-stage growth companies and entrepreneurs. In doing so, we are advancing prosperity in some of the world’s most exciting markets.
In the 1960’s, Mike Milken came up with a formula for prosperity that could be applied anywhere in the world, during any economic cycle:
P = Ft (HC + SC + RA)
Milken put forth that prosperity equals the effect of financial technologies acting as a multiplier on the total value of human capital, social capital, and the real assets (cash, receivables, land, buildings, etc.). Social capital includes the networks that are built on educational, cultural, legal and religious institutions. And human capital, which Milken saw as the most-important asset, is workforce productivity
The growth recently seen in Southeast Asia has followed the Milken model, notably in the expansion of technological innovation across the region. Governments such as Vietnam and Thailand have invested aggressively in infrastructure and skill building. A surge of investment coming from Chinese firms has brought the growth capital to this latent resource. Tencent and Alibaba are at the heart of this transformation and have catalyzed growth through mergers across private equity firms and burgeoning tech firms. These partnerships depend on regional innovation trends, paired with success along hard and software.
The same applies in these early days of African venture markets. We have been proud to grow our portfolio through recent investments in Medsaf, an organization bringing trust and efficiency to the Nigerian pharmaceutical market, where 50 percent of drugs are either fake or lack efficacy due to their quality or age; AppZone, a fintech platform building the rails for 12 of the largest banks in Nigeria, and maintaining focus on building products for existing institutions as opposed to disrupting them; SparkMeter, a team of experts tackling the critical issues of unreliable and absent power grid structures through smart meters and AMI technology.
We are believers in Africa’s innovative future but are not afraid to invest in the hard infrastructure that will undergird it. We believe that success depends on addressing the largest structural challenges that limit successful private investment in African markets.